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China watches big cash transactions to stem capital flight

New rules and digital yuan give Beijing a complete view of monetary activities

A bank employee stacks yuan banknotes in Nantong. China will start requiring banks to keep detailed records of large cash withdrawals.   © Reuters

BEIJING -- China will start tracking large-sum cash transactions to help stem capital outflows as the trade war with the U.S. continues to erode its dollar holdings.

Starting in July, banks in Hebei Province will have to record serial numbers for any personal cash transactions of 100,000 yuan ($14,100) or more and report them to the People's Bank of China.

Zhejiang Province and the city of Shenzhen will follow in October with 300,000 yuan and 200,000 yuan thresholds. The threshold for business accounts will be set at 500,000 yuan across all three areas.

The government has been cracking down on individuals trying to smuggle yuan out of the mainland to acquire Hong Kong or U.S. dollars. Beijing hopes to put in place a complete tracking regime that will help prevent capital outflows.

As the Sino-American trade war drags on, China is eager to hang on to its limited supply of dollars. Although China's foreign reserves exceed $3 trillion, the figure is expected to be much less when accounting for the surge in dollar-denominated debt, as well as for U.S. government bonds and other assets that can be cashed out quickly.

The regulations, which could go national as early as 2022, are billed as a means of curbing illegal cash transactions. Even as China increasingly goes digital for smaller transactions, like everyday shopping, cash has become a more popular option for large-scale transactions, according to the central bank.

People's Bank of China Gov. Yi Gang at a news conference in Beijing.   © Reuters

China plans to launch the digital yuan, which PBOC Gov. Yi Gang frames as an alternative to cash, by the 2022 Winter Olympics in Beijing. Lacking the full anonymity of cash, it is expected to give the government a clearer picture of how money moves. Taken together with stepped-up monitoring of cash transactions, Chinese authorities could gain a complete view of the flow of money.

The new rules could also combat the smuggling of large amounts of yuan off the mainland by individuals. In 2019, two people were detained at a Hebei airport for trying to take 1 million yuan in cash to Taiwan -- far above the legal limit of 20,000 yuan per person.

Capital outflows lead to the dumping of the yuan, weakening the Chinese currency and squeezing China's foreign currency reserves.

China's capital outflows through bank transfers and legitimate channels totaled $30.7 billion in the January-March quarter. The figure is expected to be larger when accounting for cash smuggled out of the country. China had also logged a current-account deficit for the quarter, while the reference rate for the yuan hit its weakest point in more than 12 years this May.

Restricting cash transactions could prevent the runs that have plagued Chinese regional banks. Just this month, customers rushed to withdraw money from Bank of Baoding in Hebei Province in response to rumors about its troubles.

The new reporting thresholds apply not only to in-person transactions, but also to deposits and withdrawals made at ATMs, including ones broken up into multiple smaller amounts over short periods.

Account holders will have to make reservations to make large-sum transactions in person, with banks then reporting them to the authorities. Suspiciously large or frequent transactions will be flagged.

Certain industries and account holders will be especially closely monitored in each of the three areas, such as those purchasing condominiums in Hebei Province.

In Zhejiang Province, which is home to numerous private-sector companies, authorities will closely monitor transactions involving wholesalers, retailers, property developers, construction companies and automakers. Companies in these fields will be urged to conduct large transactions through bank transfers or other cashless means.

Shenzhen will focus on startup founders, given the number of emerging businesses there, to ensure that their personal funds and corporate funds are clearly delineated. It will also work with banks in Hong Kong against the smuggling of cash to the city to be exchanged for U.S. or Hong Kong dollars.

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